Stocks rally late in the day after regulators pledge increased oversight of short sellers and a key lawmaker says the federal government is working on a permanent solution to the financial crisis.
The Dow Jones industrial average soared more than 400 points today after regulators pledged increased oversight of traders who profit from falling share prices and a key lawmaker reportedly said the federal government is weighing a long-term solution to the current financial crisis.The rally, which followed the Dow's 449-point plunge Wednesday, was a welcome respite for investors who have been battered by a global financial crisis that has choked off credit, toppled storied financial institutions and threatened economic growth here and abroad.
"If they can free up capital and get the banks lending again, then it's a whole new ballgame," said William Buechler, president of Buechler Capital Asset Management, a money management firm in La Jolla. The key is whether the regulators' talk and the rumor of legislative action turn into concrete results, he said.
The Dow finished the day up 410.03 points, or 3.9%, at 11,019.69. The tech-heavy Nasdaq composite fared even better, gaining 100.25 points, or 4.8%, to 2,199.10.
The late rally was led by financial stocks, which have borne the brunt of the selling over the last week. They were by far the best-performing sector of the Standard & Poor's 500 index, gaining 12%.
The burst of buying came late in what had been a see-saw session after wire services reported that Sen. Charles E. Schumer (D-N.Y.), the chairman of the congressional Joint Economic Committee, told reporters that the Treasury Department and the Federal Reserve were working on a "permanent" solution to the financial crisis.
Schumer urged Congress to offer financial support to companies struggling to raise capital. Many banks and securities firms are sinking under the weight of soured mortgages and of investments tied to those bad loans.
Analysts also gave credit to signs that regulators are cracking down on short sellers, investors who make bets that stocks will go down by borrowing shares and then selling them with the intention of replacing them later a lower price. Short sellers have received some of the blame for the precipitous price declines in shares of financial companies such as Lehman Bros. Holdings Inc., Morgan Stanley and Goldman Sachs.
British regulators today imposed an outright ban on short-selling of financial stocks. In the U.S., the Securities and Exchange Commission said late Wednesday that it planned to impose rules intended to rein in "manipulative" stock trading.
And New York Atty. Gen. Andrew Cuomo said today he was investigating short selling of shares of Lehman, American International Group Inc. and other financial stocks. Unlike the SEC, Cuomo has the power under New York state law to criminally prosecute traders.
Short selling is not illegal, but Cuomo said he would be looking for evidence that short sellers spread false information to artificially force down shares they were shorting.
The intervention of regulators may have convinced many short sellers to "cover" their short positions by buying stock, which gave the market a boost, some analysts said.
"The outright ban on short-selling of financial stocks catalyzed the rally in bank stocks such as Wachovia," Brian Horey, president of Aurelian Management in New York, told Bloomberg News. Similar curbs in the U.S. "can't be ruled out," he said. "It's likely that some shorts are covering in anticipation of such a move."
To cite one example, shares of investment banking giant Morgan Stanley initially continued their free fall amid signs that the company may have to seek a merger with a commercial bank to shore up its capital base. But the stock rebounded and was trading up more than 5% shortly before the end of the trading session.
The stock market was helped early on by the actions of the Fed and other central banks to calm investors' jangled nerves. Central bankers infused as much as $180 billion into global money markets and the Fed poured in another $55 billion in the U.S.
One analyst warned that the turnaround may be short-lived. Joe Battipaglia, market strategist at Stifel, Nicolaus & Co., said the U.S. economy faces challenges beyond the current credit crunch, including the ongoing turmoil in the housing industry and weakness in the job market.
"Until these fundamental conditions start to improve, the most you can hope for is for [government] policies that try to mitigate the blowout," Battipaglia said. "That is not the basis for a new bull market."
The Labor Department reported today that jobless claims rose unexpectedly last week
Also today, Dow Jones & Co. announced that AIG will be replaced in the Dow average on Monday by food and beverage maker Kraft Foods Inc.
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